There are many insurance products that protect you against life’s uncertainties. There is medical insurance, long-term-care insurance, life insurance — some celebrities have even insured parts of their body.
Although you might not need to insure your legs for $140 million like professional soccer star David Beckham or your voice for $35 million like singer Mariah Carey, you may want the protection offered by critical illness and disability insurance. Both are designed to help if you are injured and cannot work, but they are two very different financial products.
Critical illness insurance helps you pay costs associated with severe illnesses. The insurer issues a lump-sum cash benefit if you develop a covered illness. The payout is yours to use however you like. You can use it to cover out-of-pocket expenses, pay off a debt, or even pay for a vacation after you recover.
Most critical illness policies (if not all) require you to survive a minimum number of days — usually 30 days — after the diagnosis before they pay the benefit. This period is called a waiting or survival period.
Disability insurance, on the other hand, protects your paycheck. It pays a monthly benefit if you cannot work due to illness or injury. The monthly payments are designed to help you stay afloat while you are laid up. The waiting period for disability insurance can be 30 to 120 days, depending on your policy.
So, do you need disability insurance if you already have critical illness coverage?
You probably do. While the latter helps you cover out-of-pocket medical expenses associated with a life-altering disease, the former can help you put food on the table if you can no longer work due to disability.
Disability Insurance vs. Critical Illness Insurance
Here is a rundown on the main differences between the two:
What does Critical Illness Insurance cover?
Each critical illness insurance policy lists the illnesses it covers. While some only cover a handful of conditions, others offer protection for as many as 26 illnesses.
Before you sign up, make sure you check the covered critical illnesses. The insurer will not issue a benefit if you are diagnosed with a condition that is not covered in the plan. Additionally, if your condition is not life-threatening, the insurer may only pay a partial benefit.
Generally speaking, critical illness insurance covers these illnesses:
- Heart conditions – If you have a heart condition, a stroke or a heart attack, you are likely to receive the full benefit. However, in the case of coronary artery disease, the insurer may issue a partial payout.
- Cancer – If the cancer is life-threatening, the insurer will issue the full benefit. On the other hand, in the event of a less serious form of cancer, the payout is likely to be partial.
- Organ damage – This category covers conditions that occur due to kidney failure or following a major organ transplant.
- Other medical conditions – This category includes illnesses like malaria, ALS, paralysis, deafness, blindness, etc.
Typically, chronic illnesses, like diabetes or asthma, are not included. The same is the case with pre-existing illnesses. That said, since each policy has its own guidelines pertaining, read the policy terms before making your purchase.
The Cost of Critical Illness Insurance
Premiums are unique to the applicant. A number of personal and other factors impact the cost of critical illness. These include:
The younger you are, the lower the premiums. This is because statistically speaking you are less likely to develop a critical illness when you are young and healthy. As the premiums remain the same for the entire policy term, you can lock in low rates for 10, 20 years or more by buying coverage in your 20’s or 30’s.
Healthy applicants typically receive preferred rates. On the other hand, a diagnosis of diabetes or high cholesterol can mean you will have to pay a premium that is higher than the average for your age and gender.
A family history of certain illnesses, like diabetes or heart disease, can bump up your premium rate — especially if you are not in the best of health.
Smoking is linked to a higher risk of severe illnesses like heart attack and cancer. To compensate for the additional risk smokers pose, insurers charge them much higher premiums than non-smokers.
Number of covered conditions
A basic policy covering only a few conditions will cost significantly less than one that covers 20 or more illnesses.
Amount of coverage
The greater the benefit amount, the higher the premiums, if everything else remains the same. So, a critical illness plan with a $250,000 benefit will cost you more than one with a $100,000 payout.
How long the coverage lasts also impacts your rates. Because a longer term increases the chance of a payout, you will receive higher premiums for, say, a 20-year critical illness policy than for a 10-year term.
How to Obtain Critical Illness Insurance
You buy critical illness insurance much the same way you buy a life insurance policy. Shop around for a policy, choose an insurer that offers you the best rates, and select details such as the policy term and coverage amount. Depending on the insurer, you may have to take a medical exam to prove eligibility.
If you are healthy, it is always advisable to go for a medically underwritten critical illness policy. Such policies are much cheaper than those not requiring a medical exam. However, if you already have a health or life insurance policy from the carrier, you typically will not need to take a medical exam.
Who Needs Critical Illness Insurance?
People are living longer than before, which is great. What is not great though is that the longer we live, the greater the chance we have of developing a serious illness. While, a critical illness diagnosis now no longer means a death sentence, the financial strain of it can rob you of peace of mind. By providing you with a lump sum, critical illness insurance allows you to focus on your recovery rather than worrying about how you will meet the medical expenses.
If any of these statements describe you, a critical illness policy might be worth the cost:
- You have a family history of critical illnesses, like stroke, cancer, heart attack, and others
- Your current health puts you at a greater risk of developing a serious illness in the next five or 10 years
- You have limited health insurance
- You will have to dip into your savings if you develop a critical illness
What Does Disability Insurance Cover?
Disability insurance, in simple terms, covers your ability to earn. It provides a monthly benefit if you are injured or develop an illness that affects your ability to earn a paycheck.
Disability insurance covers almost every condition that can prevent you from working. This includes:
- Back pain
- Heart Disease
- Musculoskeletal disorders
- Physical injury
However, each insurer has its own definition of disability, so make sure you understand how the coverage will kick in if you cannot work because of an illness or injury.
Some policies define total disability as own-occupation; others define it as any-occupation. Own-occupation disability insurance protects your ability to work in your preferred profession. It pays benefits if you cannot work in the same profession as before the onset of your disability, even though you can work in other occupations.
A surgeon who loses an arm is an example of own-occupation disability. Because of their disability, they cannot perform the duties of their chosen profession and, consequently, will receive the disability benefit if they have an ‘own-occupation’ policy.
Any-occupation means your injury or disability is severe enough to prevent you from performing the duties of any job for which you are reasonably qualified. The same surgeon who loses an arm might not be able to perform surgery but may qualify for a teaching job in a medical school. If they have an ‘any-occupation’ policy, the insurance company will not issue disability benefits.
What about partial disability? Do disability insurance policies cover it by default? If so, would you get the full benefit in the event of partial disability?
Partial disability means following an injury or illness you can perform some of the important activities of your chosen profession but not all of them. Generally, partial disability coverage is available as a paid add-on, but some providers include it in the base policy by default. If you become partially disabled, the insurer will issue partial benefits payments (often 50-60% of the total benefit amount) for a limited period (usually 6 months).
The Cost of Disability Insurance
Younger, healthier, and non-smokers generally receive lower premium rates for disability insurance as they are less likely to suffer a disability. However, while women pay less than men for life insurance, their disability insurance premiums can be 40% higher. That is because women file more disability claims on average.
How the policy defines disability also impacts your premium rates, as does the length of the waiting period. Policies that define disability broadly are more expensive than those that do not. Likewise, the shorter the waiting period, the higher the premiums.
Other factors that influence the cost include your occupation and benefit amount. People with hazardous jobs, like those who work with heavier equipment, receive higher premiums than someone with a desk job. Similarly, the greater the disability benefit amount, the more you will pay for coverage.
How to Obtain Disability Insurance
Many employers provide disability coverage as part of their employee benefit plan. If your employer offers one, sign up for it without hesitation. Premiums for group disability insurance are usually much cheaper than for an individual policy. But if the former is not an option or does not cover you adequately — which is often the case — you should consider putting an individual disability insurance policy in place.
Who Needs Disability Insurance
Would you be able to support your family if you become ill or injured and cannot work? And if you are single, would you be able to keep yourself afloat if you cannot earn a paycheck due to disability?
If not, disability insurance could make sense for you.
In fact, disability insurance is for everyone who earns a paycheck since it covers the most important asset of all — the ability to earn.
Conclusion — Do You Need Both Types of Insurance?
If you earn a paycheck, you probably need disability insurance, even if you have a critical illness policy. It provides you with monthly payments to help you to put food on the table and pay for everyday living expenses. Together with critical illness insurance, it can protect you against life’s what-ifs and ensure you will not have to dip into your savings if you cannot earn an income due to illness or injury.